German industry fights to stay on top

The 2024 UEFA European Football Championship kicks off on 14 June in Germany, and the host nation is gearing up for a month-long festival of football.

But - while German football fans will be looking forward to some great matches and classic goals - business leaders hope football can lift the mood of a country that remains in the grips of a profound economic slump.

According to Oxford Economics, German GDP is forecast to stagnate again this year, after zero growth in 2023. A modest rebound of 1.3% is expected in 2025. Exports will grow by just 0.3% this year after falling by 1.7% in 2023.

Major international tournaments can provide a much-needed boost to national economies, but currently the mood around Euro 2024 is downbeat. According to a survey of hospitality businesses, only 16% of respondents expect the tournament to have a positive impact on bookings or turnover.

What happens in Germany matters. Europe’s largest economy is an important market for other European nations and a major exporter of manufactured goods. In the rest of this article, we’ll look at the challenges facing the German economy in the run up to Euro 2024 and dig deeper into the prospects of several key sectors.

The German economy continues to struggle

If German businesses see a light at the end of the tunnel, it remains faint and far off. We forecast that industrial production will fall by around 1% this year compared to 2023, before recovering to 3% growth in 2025.

Business investment has probably reached its lowest point and may rise in 2024, but with a growth rate of 0.4% spending will remain feeble by historical standards. A lack of spending could make German companies less efficient and competitive as the global economy expands in 2025 and beyond.

On top of it all, the adversity triggered by Russia’s war in Ukraine continues to cast a shadow. The energy crisis has eased, but gas prices are likely to settle at a higher level than before the pandemic, impacting the competitiveness of energy-intensive industries at home and abroad.

Consumer spending should return to positive territory in 2024, though we do not expect it to reach pre-pandemic levels until the end of the year. Strong catch-up wage growth will give consumers more money to spend, but gloomy sentiment could see many topping up savings rather than splashing out. 

Businesses face payment delays

The result is that businesses are struggling. Globally insolvencies are increasing in the manufacturing sector. At the same time, companies are struggling with high inflation and interest rates, and risk-averse banks have tightened their lending criteria.

Against a backdrop of uncertainty at home and abroad, it’s perhaps no surprise that in the most recent Atradius Payment Practices Barometer around half of German respondents said they were experiencing payment problems by their customers. All in all, we expect the financial situation of German companies generally to deteriorate further in 2024.

Automotive suppliers face turbulent times

German car makers are under pressure as global demand weakens and the shift to hybrid and electric vehicles gathers pace. Figures from Oxford Economics show German automotive production growth falling from 12.8% in 2023 to 3.0% in 2024 and 1.3% in 2025.

That will hit manufacturers in time, but in the short-term slowing production creates huge challenges for automotive suppliers. 

“There has been an increase in insolvencies and turbulence among Tier 2 and Tier 3 suppliers in recent months,” says Jens Stobbe, Manager, Atradius Risk Services Germany.

“Recent reports from numerous Tier 1 suppliers about plant closures, job cuts and massive cost-cutting programmes suggest that the crisis has now also fully affected these companies. As we expect sales to fall in 2024, the number of supplier claims will also likely continue to rise.”

In the longer term, German car makers will have to invest significantly to keep pace with Chinese competitors in the burgeoning electric vehicle market. We expect to see more affordable electric vehicles from the Far East entering European markets in the future. However, the EU commission is currently considering increasing import duties on Chinese electric vehicles.

Chemicals producers are reeling - but robust

Germany is by far the largest chemicals producer in Europe, accounting for more than 4% of global chemicals output. But, as an energy-intensive industry, production is still reeling from the massive gas price hikes of 2022.

Chemicals production in Germany plummeted by 12% that year, followed by a 9% drop in 2023. The better news is that production is expected to show a modest rebound of 1.6% in 2024 and 1.1% in 2025. The industry is robust, with strong capitalisation, good access to external financing, and a well-balanced debt profile.

But longer-term worries remain. Gas prices will likely remain above pre-crisis levels indefinitely as Europe replaces Russian gas with global imports of liquified natural gas. European regulations continue to tighten. Together, these factors may impact German producers’ ability to compete with American and Asian rivals.

“Businesses that are unable to pass on increased production costs to customers could struggle with cash flow and, in turn, may present a credit risk to their suppliers,” says Olaf Gierlichs-Steffens, Senior Underwriter, Atradius Risk Services Germany. “The biggest risk is the possibility of manufacturers relocating to countries where energy costs are lower.”

Low demand hampers metals sector recovery

Figures from Oxford Economics paint a gloomy picture of the German metals and steel sector, with basic metals production forecast to fall by 3.2% in 2024, after a 1.7% contraction last year.

The industry is suffering because of low demand from customers in the automotive and construction sectors, among others. The impacts of stagnant economic growth are filtering through the supply chain and impacting business at every level.

The energy crisis has also hit metals producers, and costs remain above historic levels. German metals and steel manufacturers are currently suffering from higher energy costs in competition with foreign production sites. Prices are being squeezed as restocking demand fades, and thinner margins are reducing operating revenue. As a result, we expect rising payment delays and more insolvencies in 2024.

“Germany will also need to invest in cleaner metal-producing capacity, replacing existing production,” says Michael Prüfer, Manager, Atradius Risk Services Germany. “Despite state support, the necessary investments pose a serious challenge for the industry.”

Fears of insolvencies and job losses in mechanical engineering

Mechanical engineering production nudged into positive territory in 2023, but will contract by 3.2% this year, according to Oxford Economics figures. A modest rebound of 1.6% is forecast for 2025.

Except for defence, incoming orders are declining from customers across the board. The result is likely to be an increase in short-time working or even job cuts - a worrying possibility in a sector that employs 1.2 million people. Insolvencies rose in 2023 and are likely to do so again this year.

“The situation is worsening due to the increasing number of non-payment reports following deliveries to German mechanical engineering companies,” says Jens Stobbe.

“They are currently around 40% higher than in the previous year and well above the pre-Covid level. Our current figures indicate that company bankruptcies in the mechanical engineering sector will increase noticeably.”

A goal down - but still in the game

As Euro 2024 draws near, the German economy is a goal down and struggling to find the consistency and tactical acumen for which it was once renowned. Late payments and liquidity problems are trending upwards. But all is not lost. While German industry is struggling, much remains resilient and well managed. Business leaders will be looking towards 2025 and hoping for signs of a return to form.